Time to reduce overvalued gold, says Wells Capital

By: | 02 Apr 2012

Gold is overvalued, it faces growing competition from attractively valued alternative assets and a less hostile macro economic climate, and accordingly it should be reduced in portfolios, according to asset manager Wells Capital Management.

Despite significant risk-on markets at the very start of the last decade, gold rose almost six-fold from under $300 per troy ounce since then, and the US manager acknowledges in a research note published today that gold can still provide useful defensive properties in portfolios when other assets are falling.

But important indicators suggest bullion may now be overvalued and other assets could be in for rising prices, Wells Capital Management says.

“Gold is an investment which today seems far too popular among the masses, appears extremely overvalued relative to most other asset classes and faces a challenging environment should economic confidence slowly improve in the next several years.

“The valuation of gold relative to virtually any other asset class – stocks, bonds, real estate or commodities – seems to suggest the price of gold is either extremely rich today and at risk of significant decline or suggests most other asset classes are very cheap.

“Either way, it is probably time to position portfolios to benefit from a slow but steady revival in confidence rather than in an asset which only ‘glitters’ when fear predominates.”

WCM notes: “Against most other investment classes – for example stocks, bonds, commodities, and real estate – and relative to the value of labour and a basket of consumer goods and services, the price of gold on a relative basis is either nearing, or is at, one of its highest valuations of the last 50 years.”

WCM notes at the end of the 1990s it took almost 5.5 ounces of gold to buy the S&P 500 Stock Price Index, compared to 0.8 of a single ounce now.

“Relative to stocks, gold is almost as expensive today as it was in the late 1970s when the price of gold had surged after its peg was eliminated and after the stock market was ravished by a decade of runaway inflation.”

Gold compared to Treasurys is near a high since 1945 – “remarkable…relative to an asset class of bonds which most agree is probably itself extremely overvalued”.

WCM then notes in 2000, it took less than 20 hours of work on the average hourly wage rate in the US to buy one ounce of gold, but today almost 90 hours of labor are needed, and gold relative to the goods and services behind CPI is “near its all-time record high reached in the early 1980s”.

And finally, even compared to other commodities, gold is near its all-time record, also reached back then, “even though commodity prices in general have increased significantly in the last decade”.